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Opinion

Australia throws good money after bad propping up local oil refineries

Canberra should know by now that "fuel security" is a mirage

| Australia
Scott Morrison's assertion that the aid package will secure a "boost to Australia's long-term fuel security by locking in the future" of its refining sector seems less plausible.   © AP

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets.

The Australian government's recent decision to fork out $1.8 billion to keep the country's last two refineries running for another decade is a surprisingly regressive step for a free-market economy. It could also send the wrong signal to the world of private enterprise, which thrives on creative destruction.

Australia is not alone in having to make such tough decisions. Countries face mounting challenges evolving sensible and sustainable strategies around energy security, thanks to a potent mix of environmental and economic imperatives. Resurgent resource nationalism, growing trade tensions and a new bubble mentality engendered by COVID are throwing up the wrong incentives.

As part of a deal with the Australian government, private players Ampol and Viva Energy have agreed to keep their refineries open until at least 2027, with an option to receive taxpayer handouts until 2030. The companies will use around $96.6 million each from the aid package to upgrade their plants to produce cleaner, nearly sulfur-free petrol by the end of 2024. Some of the pledged aid will only be paid if refining margins drop below a certain threshold.

According to Australian Prime Minister Scott Morrison, the aid package will save 1,250 jobs. That's probably a good political outcome but Morrison's assertion that it will secure a "boost to Australia's long-term fuel security by locking in the future" of its refining sector seems less plausible.

The oil refining sector globally was battered by a COVID-induced plunge in fuel demand and has struggled under a relatively slower recovery compared with other sectors, characterized by surplus capacity and depressed margins. Australia's relatively old and small refineries -- unable to compete with cheaper fuel imports available from newer, bigger and more efficient plants across Asia -- were already under huge pressure before the pandemic.

Stagnant domestic fuel demand disincentivized upgrades and expansions, with three refineries closing down over the past decade. Of the four refineries that remain operational, two -- one owned by BP, the other by Exxon Mobil -- will cease operations over the next few months, prompting serious concerns in Canberra over what it describes as "implications for Australia's liquid fuel security."

Exxon Mobil's Altona refinery on the outskirts of Melbourne, pictured in June 2020: stagnant domestic fuel demand disincentivized upgrades and expansions   © Reuters

That concern is curious, given that the country has the wherewithal to import any amount of high-quality fuel from the region that it pleases to supplement domestic demand. With some of Australia's shuttered refineries having been turned into import storage facilities, Australia has enough stockpiling capacity.

That brings us to the key question of what "fuel security" means for any country. Adopting the simplistic definition, that a country must be able to produce and refine all or most of its domestic fuel needs, is not only deeply flawed, but is a dangerous waste of precious time, energy and resources. Trying to achieve fuel security is to chase after a chimera.

Geology dictates a country's ownership of fossil fuel reserves and it cannot be altered. Any country can aim to build up enough refining capacity to meet its entire fuel needs. But unless it is also a big crude producer, it will also end up importing the feedstock for the refineries. Instead of alleviating dependency on external supplies, it merely shifts dependency from one type of commodity to another.

Maintaining a few months-worth of national oil consumption as a strategic reserve to tide over external supply shocks, as many import-dependent countries do, is a good idea, but it is only a short-term insurance policy.

It may seem like major oil and gas producing and exporting countries have it all because they have energy supply security. But they too are dependent on markets and buyers to monetize their oil wealth. Whether they seek to export crude or refined products, they still need consumers. These countries end up worrying about "demand security."

In short, oil is a highly interdependent ecosystem across the world. It is also a polluting fuel and an industry in unprecedented transition, in search of a balance between environmental sustainability on the one hand and energy access and affordability on the other to support overall economic development across the globe.

Oil may be a sunset industry but it needs to go a long way before cleaner economic alternatives can claim the lion's share of the world's energy supply. We need to not only use fossil fuel resources wisely along that uncharted journey but ensure it is done in the most cost-effective manner. That not only means technological progress but reliance on the efficiency created by free markets that steer clear of subsidies, that reward innovation and competition, and constantly weed out ineffective components of the system.

A sound, forward-looking national energy strategy, no matter in which part of the world and for which kind of economy, needs to embrace those core tenets.

Once Australian taxpayers stop subsidizing their operations, the country's two remaining Australian refineries may still decide to fold up their tents after all. If that happens, Australia will remain wholly or mostly dependent on imports for its fuel needs, and that is no reason for the government to lose sleep.

But that $1.8 billion the Morrison government is spending now might have been better spent on energy conservation, efficiency and transition projects, which also create long-term employment opportunities.

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